Oct 16, 2017 term paper 2

What are the Advantages and Limitations of Comparing Audit Client Data With Industry Data During the Planning Stage of an Audit?

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Question 1:
Alice Riley is the partner in charge of the audit of Walter Hugh Ltd, a large listed public company. Alice took over the audit from Marjorie Platt, who has recently retired from the audit firm. Marjorie was a very experienced auditor and the author of several reports into ethical standards in business, but Alice did not regard her highly due to her inability to grow non-audit service fee revenue for the audit firm. Alice sees an opportunity to increase the provision of non-audit services to Walter Hugh Ltd and thus increase her reputation within the audit firm.
(a) Discuss the potential effects on Alice’s reputation in the audit firm if she is able to increase the level of non-audit service fee revenue from Walter Hugh Ltd. In your answer you should refer to specific sections of APES 110.
(b) Which non-audit services would you advise Alice to avoid trying to sell to Walter Hugh Ltd because of their potential ethical issues for the audit firm? In your answer please identify specific relevant sections of APES 110.
(c) Would it make any difference to your answers if Walter Hugh Ltd was a proprietary company, not a listed public company? Please explain your answer.
Question 2:
Analytical procedures can be an extremely powerful tool in identifying potential problem areas in an audit. Analytical review can consist of trend and ratio analysis and can be performed by comparisons within the same company or comparisons across the industry. The following information shows the past two periods of results for a company and a comparison with industry data for the same period:                                                                                                 CHAT
(a) What are the advantages and limitations of comparing audit client data with industry data during the planning stage of an audit?
(b) From the preceding data, identify five potential risk areas and explain why they represent potential risk. Briefly indicate how the risk analysis should affect the planning of the audit engagement, ie areas on which the audit should focus and specific audit tests. You should present your answers in the following format:
CHAT1Question 3:
If a company’s control risk is assessed as low and the auditor intends to rely on internal controls, the auditor needs to gather evidence on the operating effectiveness of the controls.
For each of the following internal control activities:

(a) indicate an audit procedure the auditor could use to test the operating effectiveness of the control;

(b) provide an example of a potential fraud or error that could occur if the control was not operating as expected;

(c) explain how the auditor’s substantive tests should be expanded to test for the potential fraud or error.
Control activities:

a) All merchandise receipts are recorded on pre-numbered receiving slips. The controller’s department periodically accounts for the numerical sequence of the receiving slips.
b) The accounts receivable bookkeeper is not allowed to issue credit memos for returned goods or to approve the write-off of accounts receivables.
c) Employees are added to the payroll master file by the payroll department only after receiving a written authorization from the personnel department.
d) Edit tests built into the computerized payroll program prohibit the processing of weekly payroll hours in excess of 53 for an individual employee.
e) A salesperson cannot approve a sales return or price adjustment that exceeds 6% of the cumulative sales for the year for any one customer. The divisional sales manager must approve any subsequent approvals of adjustments for such a customer.
CHAT2Question 4:
Accounts payable is generally one of the larger and most volatile liability accounts to audit. However, the auditor can use the assertion approach to develop an overall audit program for accounts payable. Assume that you are auditing the accounts payable account for Appleton Electronics, a wholesaler of hardware equipment. You can assume that the company has good internal controls and is not designated as a high-risk audit client. You have been the auditor for the client for a number of years. During the previous audit, adjustments were made regarding accounts payable but none of them was considered material.

(a) Identify the financial statement assertions that apply to accounts payable.
(b) For each assertion, identify two substantive audit procedures that would test the assertion. You should present your answer in the following format:

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